Question

2. Wyeth-Ayerst Laboratories developed Norplant, a long-acting contraceptive in the early 1990's. In the United States, the firm priced the contraceptive at $350, and in other countries, the firm priced it at $23. a) What type of monopolist is Wyeth-Ayerst? What information and conditions must exist for Wyeth-Averst Laboratories to sell the contraceptive at 2 different prices? b) Assume that if the firm were to charge only one price for the contraceptive it would be $350 dollars. Also assume that at $350 foreign consumers find the price too high to buy any of the product but at a lower price they would buy a positive amount of the contraceptive. What are the welfare implications of such a policy?

Answer 1

a) the company is follows third degree price discrimination and therefore it is a price discrimination monopolist. This is is observed from the fact that in the domestic region the price charged is different (high) and in the foreign region the price charged is different (low).

Required conditions include the difference in the elasticity of demand in two regions, power to control prices and have segmented markets, and the ability to prevent resale between two regions

b) in comparison to the third degree price discrimination, there will be a welfare loss following a single price monopoly. This is because when only one price is allowed to be charged in two regions, there will be no profit from foreign change it is given that the price is too high for any foreign consumer to make a purchase. Hence single price will result in loss of entire market in foreign region.

This shows that the firm can increase its profit if it charges different prices in different regions which is also welfare increasing since it will increase overall consumer surplus.